If your modified adjusted gross income is less than $100k and you meet the material participation requirements you can bring up to $25k of losses over. 

However; it's very hard, and extremely competitive right now for spec financing, and finding a HML may be your best option.Also, you might try to find someone that owns their land free and clear to either joint venture with you, or subordinate to a construction loan.You didn't mention what you experience is, or how you would be participating.

If you do decide to do this project I would make sure you have people from this community participating .  

Because in a trustee sale, the county has nothing to do with the auction, the Trustee Service is running the show.If you are going to bid at auction, then you will want to attend several before actively participating.

I wanted to run a situation by whoever wants to participate.

Looks like an absolute non starter.2nd position alone, with little to no equity is enough to walk away.No personal guarantee offered.As @Jay Hinrichs mentioned, a "notarized note" means absolutely nothing, and seems to be trying to offer some false sense of security.And worse, as a participant in a fractionalized note you have absolutely no control when something goes wrong....you'll just be sitting back saying "let me know how it all works out".

This is in no way a passive activity, even though it may be part time, and you will want to show it as full time for tax purposes.As a private investor you have no decision making in the deal, and all you get are monthly, quarterly or annual statements, depending on the sponsorship, so there is no active participation in the investment.

A question I have about deductions for STR, say I am operating an active STR (average 7 days stay or less, with material participation and not offering any sub services).If I travel to the beach to checkout properties am I interested in buying to operate as a STR, can I deduct the cost of travel, stay, meals, gas, etc?

Looking forward to participating in forums to share experience and knowledge in REI! 

What you need is "material participation" which you might already have, based on your short description.